1

Integrating Global Supply and Marketing Chains

15.220 Global Strategy and Organization

Donald Lessard

Sloan Fellows ProgramMIT Sloan School of Management

March 2008

History• 1963.- Amancio Ortega starts a factory of women’s

dressing gowns

• 1972.- Confecciones Goa is constituted as a Factory to supply wholesalers

• 1975.- Zara, the flagship of the Inditex Group is created

• 80s.- Spanish Development

• 90s.- Internationalization

• 00s.- Sustained Growth and Development

Timeline of Inditex’s Internationalization

Zara ?’s

• How well does Zara perform compared to its competitors?

• What are the sources of Zara’s competitive advantage? • Which of these result from the “Spanish diamond”?• How well do the various elements of Zara’s business

model “travel globally”?• Why might Zara “fail”? • What are the best ways to grow the Zara chain? • What are your top 3 recommendations to Inditex CEO

Jose Maria Castellano re the internationalization of Zara?

Comparative Performance

Inditex H&M Gap Benetton

Op. Margin 21.7 13.8 1.7 13.6

ROS 10.5 9.6 -0.1 7.1

Working capital/sales

.6 24.2 7.1 28.7

PPE/Sales 41.1 15.3 23.1 34.4

Asset Turnover

125 196 182 74

ROA 13.1 18.8 -0.1 5.2

ROE 22.9 24.8 -0.3 11.9

Elements of Operating Margin

Representative Competitor

Zara

Posted price- markdown

100-10.5

100-2.6

Retail selling price- man. Costs/selling price

89.5-44.8

97.4-51.1

Gross Margin- advertising

44.7-3.1

46.3-0.3

Adv adjusted Gross Margin

41.6 46.0

Zara’s Competitive AdvantageCentrally Managed Inventory: Controlled and timely delivery of clothing to all stores across the world • Reduced design cycle time: Timely response to items that sell well, ability to quickly alter/enter with new designs • Strong IT system: Allows almost immediate communication of sales and inventory information across enterprise • Logistics/Distribution: Clothes move within hours to their destination, efficient scheduling of shipments,>>aggregation? (Barry Bunn)

•The new business concept and marketing of “Fashionable but reasonable & convenient”.

•Very sophisticated supply-chain system based on their IT system, which enable them to manage “very quick lead time”, “reducing inventory risk”, and “keeping up with updated fashion”, and “keeping up with real market trend/needs”.

•Very sophisticated retail management system (its skill and knowhow) based on their IT system.

•Very well organized centralized design & product development system, by mixing Push-marketing and Pull-marketing.

We feel that their business concept (brand concept), retail management system and design & product development system are scalable, given Zara’s sophisticated communication and data gathering and analysis system..

(Fernando Diarte, Toshi Kajino, Devon Kinkead, Juan Carlos Munoz, Shuichi Yokoyama)

Delivery cycle/IT

Best stores,

image

Zara Business Model

Fresh merchandise,Low stock

“Get it now”

Excitement, Immediate purchase

Limited markdowns

High “yield”

Fast design

Asian sourcing for baseItems

Improved costmix

Zara sweet spot

Fast follower

Design Sourcing/Manufacturing Retail Sales

Focusedfactories

Test designs

Greige purchase

Speed

Cost

Speed vs. CostSp

eed

Low

(6

mo'

s)

H

igh

(5 w

eeks

)

High (10) Low (.1)Productivity adjusted cost

Zara

H&M

Lo-turn

Benetton

Liz C

Home AdvantagesRivalry

Factor conditions

Related, supporting

Demand ConditionsIInditex/Zara at the time of the case bears many similarities to the CEMEX expansion into Spain. The business environment of Spain/Western Europe presented to Zara was asymmetric in that it possessed many of the positives of basing operations in a developing world, while simultaneously insulated from many of the negatives. Regarding the so-called “Spanish Diamond,” Zara benefited from very positive factor conditions (inexpensive labor, numerous and experienced apparel workshops nearby, etc). Spain also clearly presented a geographic advantage by having a close proximity to sophisticated markets (France, Italy), and even exhibited a dynamic local market, evidenced by an emergent national fashion market (Hyunyoung Kim, HoJun Lee, Timothy McKelvy, Jong Moon Sohn, Andrea Whitson)

Zara and the three A’s

AggregationAdaptation

Arbitrage

How might Zara Fail?

• Another firm might match speed (aggregation) with lower cost (arbitrage)

• Complexity of multiple lines, multiple regions• Might not master real estate in new regions

How to grow?

• 1. Try to implant their supply chain system in Asia (basically in China) and America (basically in Mexico and Caribbean countries), and try to have 3 strategic production points for their global distribution, and try to use those production points for their basic items/products manufacturing for each market, Asia and America. (Let’s say, 30-40% from current Spain manufacturing, the rest from localized manufacturing for basic/standardized items).

2. Try to accelerate their brand portfolio strategy and promote other brands as well at the same time. (Don’t concentrate into Zara only)

3. Try to enhance their sophisticated design and product development system (as a super ‘copy’ (knock-off) machine !!). In order to do so, they should keep sending design staff to all important lead market and necessary trade shows, Milan, Paris, London, Tokyo and NY, and also maintain the communication system between design staff and each shops even in all over the world.

(Devon Kinkead, Fernando Diarte, Juan Carlos Munoz, Shuichi Yokoyama, Toshi Kajino)

RATs test

• How far do these models/advantages travel without a local distribution hub?

• How far do they travel without local production hub?• How replicable is whole system?• Which lines travel best?

How well does the model travel?RelevanceZara’s value proposition of high velocity fashion appeals to a global audience that is fashion conscious and discerning in price. However, it’s relevance depends on the relative wealth of different countries, as well as the fashion culture. For example, the target class in Spain is 80% of the population while only the upper and middle class in Mexico can afford Zara. TransferabilityZara has adopted several innovations that facilitate its transferability. These include:1. Standardized store implementation – this enables Zara to maintain its global image and store quality and quickly allows new store managers to focus on activities that drive store sales.2. Individual inventory response – each stores inventory is uniquely driven by the store clientele, thereby enabling each new store to maximize its value to its local target clientele.AppropriabilityZara’s power is not easily duplicated as they control a significant portion of the value chain. Even through Zara adopted alternative market entry modes such as joint ventures or franchises, the dependency on Zara’s centralized system ensures that Zara can appropriate the most significant portion of available rents from their markets. (Masaharu Aiuchi, Peter Curley, Tuang Liang Lim, Brian Wilson, Zhan Xu)

Where to Grow? (RATs)

Eastern Europe

Latin America

North America

Asian big cities

China Korea Japan

Without dist’n hub

With distn’ hub

With dist’n + prod’n hub

Where to Grow (How)?Zara should consider replicating important elements of their “regional platform” and supply chain structure in North American and Asia if they are serious about becoming more than a niche player in those markets. Over and above tariff and logistical costs (which add roughly 25% to their FOB prices in the USA), Zara needs to become more attuned to fashion preferences and demand conditions in these regions as it is questionable whether cherry picking from their current collection will be as successful in non-European markets. This would imply that regional design capabilities would need to be developed as well as relationships with local suppliers and workshops for final stitching to decrease costs. Finally, in the generally more price sensitive North American and Asian markets, it is unlikely that the current strategy of leveraging the comparatively low cost of Spain to charge a premium in other European markets to support expansion will be transferable. (Martin Croot, Franco Herrera, Chihon

The game changing plan for successful internationalization starts with top management jettisoning underperforming/under optimized brands from Inditex. Second, management must aggressively search for a site for a second distribution center on another continent. Recognizing this is no easy feat, significant resources should be dedicated to not only finding a suitable competitive second home base, but also a potential acquisition target conversant in local laws, customs, etc. This go big or go home strategy of seeking another likeminded, but locally knowledgeable firm is critical for the Zara style model to be successful in geographic locations far away from Northern Spain (Mary Gallagher, Alexander Onik, Manjit Kalha,

Park, Diego Parlaghy)

Jazlinawati Osman, Harry Schechter)

Where to Grow? Platforms/Arbitrage?

• Overcoming weaknesses of (threats to) home diamond?

Rivalry

Factor conditions

Related, supporting

Demand Conditions

Zara GI/LR

Glo

bal i

nteg

ratio

n

Local Responsiveness

.

High

Low

Low High

Zara

Sales/Mix

SourcingDesign

..using the Bartlett and Ghoshal model, we see that Zara excelled on all 3 dimensions. On the efficiencyfront with its IT systems that were almost ahead of their time ..On the Knowledge Leverage front, it kept a close watch on demand trends and performance for stores and products and used that information to make quick decisions about production needs and the ruthless removal of failed products.On the Responsiveness front, Zara allowed store managers to make product restocking decisions and also allowed local markets to set price whereas it coordinated activities that benefit from economies of scale from the global level. This dual model allowed Inditex to do the appropriate thing in each market situation.(Cristiano Malucelli, Venkat Rangamani)

Building GI and LR

Customer/Market focus right down to store manager• Market (segment) profit focus• Management autonomy (substantial on some dimensions,none on others, all within model)

Spain Other East.core WE Eur. NA LA SEA China ..…

General Takeaways

• Arbitrage (labor costs) do not drive everything!• Cleverness (heterogeneity) still counts• Aggregating (in key regions) still counts

• Common processes that deliver customer value are key• Need to be aware of scale at various levels• Need to be aware of which elements travel (how far)

• Great firms constantly seek to stretch diamond

Deep Dive

• BTC• Web site by end of week• Intro session after you return• Presentations on April 4th

• Good to review over break, but concentrated work in early April.

Global Leaders

• Describe and evaluate Ghosn’s key acts of leadership in the Nissan turnaround in terms of the Sloan Leadership Model (sensemaking, visioning, relating, inventing).

• To what extent do these behaviors correspond to Bartlett and Ghoshal's global leadership categories (global leader, country leader, functional leader)?

• What leadership elements most saliently reflect the global/international nature of the Ghosn’s intervention?

• What benefit is Ghosn seeking for Nissan from the alliance with Renault?

• How is he doing this? If possible, please describe in terms of “global integration” and “local responsiveness/ embeddedness.”

• Think about other Sloan Fellows in visible global leadership positions and relate their challenges and actions to the SLM. Think about your own Global Leadership position and style when you return to the “real world.”